Good day and thank you for standing by, and welcome to Q1 2024 KVH Industries, Inc., earnings conference call. (Operator Instructions) Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Anthony Pike, Chief Financial Officer. Please go ahead.
Anthony Pike
Thank you, operator. Good afternoon, everyone, and thank you for joining us today for KVH Industries first quarter results, which are included in the earnings release we published earlier this afternoon. Joining me on the call is the company's Chief Executive Officer, Brent Bruun. Before I get into the numbers, a few standard statements. Firstly, if you'd like a copy of the earnings release or if you'd like to listen to a recording of today's call, both will be available on our website. If you are listening via the web, feel free to submit questions to [email protected]. Further, this conference call will contain certain forward-looking statements, which are subject to numerous assumptions and uncertainties that may cause our actual results to differ materially from those expressed in these statements. We undertake no obligation to update or revise any of these statements. We will also discuss adjusted EBITDA, which is a non-GAAP financial measure. You will find a definition of this measure in our press release as well as a reconciliation to comparable GAAP numbers. We encourage you to review the cautionary statements made in our SEC filings, specifically those under the heading Risk Factors in our 2023 Form 10-K, which was filed on March 15. The company's other SEC filings are available directly from the investor Information section of our website. Now to walk you through the highlights of our first quarter, I'll turn the call over to Brent.
Brent Bruun
Thank you, Anthony, and hello, everyone. Let me start out by providing a high-level overview of our results. Q1 airtime revenue was $23.6 million, down $3.5 million from Q1 2023. Airtime gross margins remained steady compared to Q1 2023 and total revenue for Q1 was $29.3 million, roughly a 14% decrease from Q1 2023 due to the continuing decline in our product sales and an approximate 4% reduction in our vessel base. We believe that the changes we are making within our business will reverse the contraction in revenue that we have experienced. We've had a very productive two months since our Q4 2023 earnings call. We made substantial progress on our reorganization effort, which was initiated in February. This effort enables us to focus on our commitment to deliver integrated services using our multi-orbit, multi-channel network strategy, and to accelerate our evolution from a capital-intensive hardware focused business into a more nimble, integrated solutions-oriented organization. KVH's maritime VSAT and television antennas continues to be a valuable component of our portfolio. However, the changing product mix driven by new LEO services, does not warrant the continuing operation of a dedicated manufacturing facility. We are in the midst of buying components to complete our final build plan. All component purchases and a substantial portion of the VSAT and TVRO terminals will be completed by the end of June, at which time we will significantly reduce the number of employees in the facility. The remaining reduced staff will focus on repairs, refurbishments, and will continue to slowly build antennas for the remainder of this year and next year. We will have sufficient TracNet and TracVision terminals to meet anticipated demand through 2025 and possibly a portion of 2026. We anticipate that our reorganization efforts will result in annualized savings of approximately $9 million, with the initial benefits being realized in the third quarter of this year. New additions to our product and service portfolio are generating significant interest. During the first quarter, we introduced CommBox Edge, an advanced network and bandwidth management solutions. As fleet managers and yacht owners begin to add new communication systems such as LEO and 5G cellular to their existing VSAT systems, we expect that the ability to manage those channels will become increasingly vital. Our CommBox Edge service offering delivers those capabilities affordably and securely using the CommBox Edge 6 and CommBox Edge 2 below decks units and powerful cloud-based tools. CommBox Edge also augments the tools available from other services. For example, CommBox Edge expands the reporting for Starlink daily usage and adds management tools not currently available from Starlink. We are very excited about the enthusiastic response to these tools and their modern mobile-friendly user interface received from our customers. The fastest growing addition to our portfolio is Starlink. Demand remained strong. In fact, we almost doubled our strong Starlink terminal shipments compared to Q4 of last year, just under half of those systems have been activated. So we will see airtime subscriptions from Starlink, and the Companion KVH OneCare service fees begin to contribute in Q2. Offering Starlink also lets us engage with new customers who have never worked with KVH and retain existing customers who might have otherwise left as they shift their primary communications away from VSAT to this new low earth orbit service. At the same time, we are making excellent progress integrating OneWeb's global service into our multi-orbit, multi-channel network strategy. We expect to launch the service by the end of the second quarter. We have commenced presales sales efforts, and which are resulting in a robust opportunity pipeline. Subscriber growth through Starlink, OneWeb, CommBox Edge, and other value-added services are key to our future success, where we once measured our progress based on the number of terminals we shipped, airtime and service subscriptions now represent the bulk of our revenue. With that in mind, we are changing how we calculate reported active subscribers. Previously, we reported the number of VSAT terminals as our subscriber count. That worked fine when we were only shipping these tech systems. However, our evolution to a multi-orbit, multi-channel model means more vessels are turned to KVH for more than one satellite-based communications terminal. As a result, we are now using a more straightforward approach and report on the total number of subscribing vessels. We believe this is representative of the changes in the market and our business while providing more clarity on the number of subscribers. Based on our previous reporting method, we ended Q4 of 2023 with roughly 6,900 subscribers. Based on this new reporting method, we ended 2023 with 6,700 subscribing vessels and 6,600 vessels at the end of the first quarter. We believe that our accelerating Starlink activations, the addition of OneWeb, and CommBox Edge deployments will spur new subscriber growth beginning in the third quarter. The reality of our industry is that GEO-only subscriptions are contracting while GEO/LEO hybrid solutions are becoming more popular. The planned acquisition of Intelsat by SES is an illustration and the pressure on the GEO market. Intelsat is our Ku GEO partner, and at this time, we do not anticipate any disruptions to our service or changes to our arrangement with Intelsat. We are on our way to achieving strategic and operational goal. We have a plan to resume the growth of our subscriber base, airtime revenue, value-added service subscriptions in the second half of this year. While we are facing some turbulence during this transition, I believe we're on the right path and will emerge as a financially sound, growing world-class solutions provider built on global airtime and superior service and support. Now I'd like to hand it back to our CFO, Anthony Pike, for a look at the numbers.
Anthony Pike
Thank you, Brent. As a reminder, I would like to note that similar to our call for Q4, I will not restate data that is in the earnings release or clearly described in our 10-Q. I will focus my comments on information that either elaborates on or clarifies the published data. So with respect to our first quarter financial results, airtime gross margin, which is not reported in our earnings release, was 41.8%, essentially flat compared to prior year gross margin of 42.0%. As noted during prior calls, we do expect airtime margins compressed slightly as LEO services become a larger percentage of our total airtime revenue. As Brent noted, total subscribing vessels at the end of Q1 were just over 6,600, which is approximately 4% down from Q1 of last year. Compared to year end 2023, total vessels were lower by approximately 2%. Reported Q1 product gross profit of negative $1.1 million, including [$9.4 million] of employee severance charges related to the reorganization and manufacturing wind down. Excluding the manufacturing restructuring charges, product gross profit was a negative [$9.7 million] as compared to a positive [$9.1 million] in Q1 of last year. Once we have completed our manufacturing wind-down initiatives and to build sufficient inventory levels to satisfy demand for the foreseeable future, we expect product gross profit to return to positive territory. The Q1 operating expenses of $13.7 million include $1.7 million of employee severance charges relating to the restructuring initiatives and manufacturing wind down announced on February 13. Overall, we expect to incur further employee severance charges of $1.1 million in Q2 for these changes will generate $9.1 million of annualized savings in employee costs. Around $3.7 million of this will benefit product gross profit and around $5.4 million will reduce operating expenses. Our adjusted EBITDA for the quarter was a positive $2.0 million, and our earnings release has the usual reconciliation of that. Capital expenditures for the quarter were $2.3 million. And so, adjusted EBITDA less CapEx was negative by about [$9.3 million]. This compares to a positive $1.6 million in Q1 of the prior year with adjusted EBITDA of $3.7 million, less capital expenditures of $2.1 million. Our ending cash balance of $66.6 million was down approximately $3 million from the beginning of the quarter. This was mostly driven by an increase in our working capital with reduced payables to our satellite bandwidth providers. In light of the intensifying competition that we are seeing from lower cost LEO satellite service providers, customers are reducing that level of GEO services. In consideration of this industry transition and the specific risk factor described below, we are reducing our expectations for revenue and adjusted EBITDA in 2024. At this time, we expect that our 2024 revenue will be in the range of approximately $117 million to $127 million, and that our 2024 adjusted EBITDA will be in the range of approximately $6 million to $12 million. A key driver of this reduction is an acceleration of the previously disclosed transition by one of our largest customers, the US Coast Guard and its primary satellite service relationship to Starshield. As a result of the accelerated transition, the decline in revenue from this customer will occur earlier than originally anticipated. Reducing the aggregate amount of revenue we expect to receive in 2024. Investors should appreciate that in light of the uncertainty caused by the broad industry transition currently underway, there is an increased risk of variability between our forecasted and future actual financial results. As the year progresses, we may announce further revisions to this guidance. This concludes our prepared remarks, and I will now turn the call over to the operator to open the line for the Q&A portion of this afternoon's call. Operator?
Question and Answer Session
Operator
(Operator Instructions) Chris Quilty, Quilty Space.
Chris Quilty
Thanks. Hey, guys. Question for you. The gross margins here in the first quarter were a little bit better than I was expecting where there's some one-offs there, and I think you did indicate we should expect more towards mid-30s gross margin on the airtime.
Brent Bruun
Yeah, as we've been reporting for a while, Chris, we anticipate new margins to contract somewhat. We had some good pickup in the quarter, in particular, on the Starlink side, not only we're on a base Starlink, but more for the services that we're combining with Starlink. Do you have anything to add to that?
Anthony Pike
No other than just to say that, of course, you know, the vast majority of our airtime is still driven from our GEO network, which still has a higher margin. So I think we still anticipate a slight reduction in our margin on airtime as Starlink becomes a bigger proportion of our overall revenue.
Chris Quilty
Got you. And I mean, you can't go into too much detail, but the contract that you have with Intelsat for capacity, up until a year ago, you were sort of scaling up the amount of capacity and agreements there, what are the provisions for that contract as we're seeing demand for GEO capacity going down? Do you get stuck with some percentage in fixed costs associated with that?
Brent Bruun
(multiple speakers) Basically our contract with Intelsat really mirrors what we anticipate going on within the market as far as reduction in bandwidth. As you said, I can't go into a lot of details on that, but we feel comfortable with how we structured our renewed arrangement with them, which we renewed last year, and it commenced at the beginning of this year.
Chris Quilty
Got you. And how about OneWeb, how is that capacity arrangement? Is that -- you're sort of paying by the drink? Or do you anticipate entering into some sort of a long-term agreement there?
Brent Bruun
We've already signed an agreement with OneWeb last year. They're just building out their lander stations. We've made arrangements to procure terminals. It's basically a multiyear arrangement where we can buy wholesale from them and create our own unique airtime plans.
Chris Quilty
Got you. And presumably that capability is all already layered into the CommBox Edge?
Brent Bruun
Yes.
Chris Quilty
Great. And did you -- are you sure you mentioned that you have already begun shipping yet or is that a product that starts --?
Brent Bruun
The CommBox Edge we shipped it. It's the services launched. We have two variants of the low decks unit, one with six ports, one with two. It's being very well received and we've done a tremendous amount of work as far as getting the word out, if you will through both training sessions with our service providers, our employees, our dealer network, and we've done it all. And we provided these same physicians all around the world and through a web-based and/or teams-based overviews.
Chris Quilty
Got you. And to be clear, is that product mostly targeted at a commercial user or is there a government and or leisure more component as well?
Brent Bruun
Well, absolutely commercial with leisure marine, definitely, but more to higher end of leisure marine, where you'll have more than one communication path onboard via the vessel, where both -- government, it would be an attractive solution as well, and we're focusing on all three.
Chris Quilty
Great. And I guess finally, just circling back to Starlink, do you see them -- their penetration of the market, is it fairly steady? Do you think -- see things accelerating? And I think you did mention that some of the customers who are signing up are nontraditional customers that you wouldn't have seen before? Are there opportunities to sell them other services that they might not have?
Brent Bruun
Yes, I absolutely. And we are seeing an acceleration as I said on the on the call, we shipped twice as many terminals in the first quarter as we did in the fourth, but only half of those have been activated. So we should see the tail effect from an airtime taking hold. And we're selling that both as a standalone solution as well as a bundled solution with our VSAT service.
Chris Quilty
Got you. And can you share that split between those two solutions?
Brent Bruun
Pretty close to 50-50. I can look into and get back to you, but it's very close to a half.
Chris Quilty
That's good. I mean, it's better than I would have expected. (multiple speakers)
Brent Bruun
Sorry, go ahead, Chris.
Chris Quilty
No, no, that's good. That appreciate all the feedback and good luck here.
Brent Bruun
Okay. Thanks, Chris.
Operator
Thank you. At this time, I'm showing no further questions. This concludes today's conference call. Thank you for participating. You may now disconnect.